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The Social Security Early Entitlement Age in a Structural Model of Retirement and Wealth

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  • Alan L. Gustman
  • Thomas L. Steinmeier

Abstract

This paper specifies and estimates a structural life cycle model of retirement and wealth that explains the peaks in retirement both at ages 62 and at 65. Our estimates suggest that leisure and time preference are widely distributed among the population, with a bimodal distribution of time preference. Discount rates are either very low or very high. Those with high discount rates find the actuarial adjustments in Social Security benefits, which use a 3 percent real interest rate, to be inadequate. Once they reach age 62, the benefit accrual profile declines with age. This is the major explanation for the spike in retirement activity at 62. Liquidity constraints from inability to borrow on Social Security and pension benefits add to this effect. Simulations with the model suggest that raising the Social Security early entitlement age from age 62 to 64 will shift about three fifths of the bunching of retirements at age 62 to age 64. The bunching amounts to about 8 percent of the population, so raising the Social Security early age of entitlement will cause about 5 percent of the population to delay their retirement, implying a substantial effect on the Social Security system and its finances.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9183.

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Date of creation: Sep 2002
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Publication status: published as Gustman, Alan L. and Thomas L. Steinmeier. "The Social Security Early Entitlement Age in a Structural Model of Retirement and Wealth." Journal of Public Economics 89, 2-3 (February 2005): 441-63.
Handle: RePEc:nbr:nberwo:9183

Note: AG LS PE
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  1. Alan L. Gustman & Thomas L. Steinmeier, 1983. "A Structural Retirement Model," NBER Working Papers 1237, National Bureau of Economic Research, Inc.
  2. Andrew A. Samwick, 1997. "Discount Rate Heterogeneity and Social Security Reform," NBER Working Papers 6219, National Bureau of Economic Research, Inc.
  3. Rust, J., 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Working papers, Wisconsin Madison - Social Systems 9430, Wisconsin Madison - Social Systems.
  4. Robin L. Lumsdaine & Olivia S. Mitchell, . "New Developments in the Economic Analysis of Retirement," Pension Research Council Working Papers, Wharton School Pension Research Council, University of Pennsylvania 98-8, Wharton School Pension Research Council, University of Pennsylvania.
  5. Eric French, 2000. "The effects of health, wealth, and wages on labor supply and retirement behavior," Working Paper Series, Federal Reserve Bank of Chicago WP-00-2, Federal Reserve Bank of Chicago.
  6. Coile, Courtney & Diamond, Peter & Gruber, Jonathan & Jousten, Alain, 2002. "Delays in claiming social security benefits," Journal of Public Economics, Elsevier, Elsevier, vol. 84(3), pages 357-385, June.
  7. Gustman, Alan L & Steinmeier, Thomas L, 2000. "Retirement in Dual-Career Families: A Structural Model," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 18(3), pages 503-45, July.
  8. Alan L. Gustman & F. Thomas Juster, 1995. "Income and Wealth of Older American Households: Modeling Issues for Public Policy Analysis," NBER Working Papers 4996, National Bureau of Economic Research, Inc.
  9. Eric M. Engen & William G. Gale & Cori R. Uccello, 1999. "The Adequacy of Retirement Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 65-188.
  10. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 3-95, Wharton School Rodney L. White Center for Financial Research.
  11. Hayashi, Fumio & Altonji, Joseph & Kotlikoff, Laurence, 1996. "Risk-Sharing between and within Families," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 261-94, March.
  12. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, Elsevier, vol. 23(1-2), pages 81-114.
  13. Alan L. Gustman & Thomas L. Steinmeier, 2002. "Social Security, Pensions and Retirement Behavior Within the Family," NBER Working Papers 8772, National Bureau of Economic Research, Inc.
  14. Kahn, James A., 1988. "Social security, liquidity, and early retirement," Journal of Public Economics, Elsevier, Elsevier, vol. 35(1), pages 97-117, February.
  15. Alan L. Gustman & Thomas L. Steinmeier, 2004. "Personal Accounts and Family Retirement," Working Papers, University of Michigan, Michigan Retirement Research Center wp067, University of Michigan, Michigan Retirement Research Center.
  16. Jonathan Gruber & David A. Wise, 1999. "Social Security and Retirement around the World," NBER Books, National Bureau of Economic Research, Inc, number grub99-1, July.
  17. Alan L. Gustman & Thomas L. Steinmeier, 2001. "Retirement and Wealth," Working Papers, University of Michigan, Michigan Retirement Research Center wp002, University of Michigan, Michigan Retirement Research Center.
  18. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
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